Paper Chase: Buy A House

58 dollar per barrel oil? Yep, due to increased supply from the U.S., a strong dollar, and decreased global demand.

Retail sales came in up .7% stronger than expected. This is important because consumers makeup two thirds of the economy.

Oil

Investors have been nervous about slowing economic growth as both China and Europe are weak. Oil prices in this type of environment have historically indicated a recession. How much movement is due to supply and how much to demand? Investors are getting out of oil either way, and it is my opinion the sharp 40% decline over the last three months is due to the relatively strong dollar and market positioning.

Normally, when the stock market does well, Wall Street revels while Main Street continues to struggle. Now consumers have billions of extra dollars due to lower oil prices. It’s a blessing in the form of an extra tax cut that favors the middle class rather than the wealthy. It is progressive, the exact opposite of, for example, the mortgage interest deduction. It impacted the holidays, as evidenced by strong retail sales. A decline in oil prices takes weeks to trickle down to the gas pump and then to consumers’ pockets. We are seeing results from a month ago, and the good news should continue.

Regardless of the usual Santa Claus rally, it was a tough year for active management. The question will be markets think about 2015. There could be a silver lining to the anxieties about China and Europe. Investors worried about those markets are looking to American companies as a safer bet. The liquidation of energy stocks has created opportunity, for no one is distinguishing between good and bad companies.

Where is the correction? While there is shakiness in global markets, our economy is doing well. Generally investors are not that optimistic, as there are real worries about oil and high yield. They are also frustrated by performance against the indexes; nonetheless, I expect January should be strong.

The jobs number is the best in 15 years. While there could be some panic due to the Fed eventually raising rates, conventional wisdom says it’s coming down the pike later on. Look through the troubles of oil and high yield, and focus on fundamentals. Companies are in great financial position, and consumers have a lot of purchasing power. Although the consensus is to brace for tightening by the Fed, that could actually happen later than people expect.

Buy A House

The requirements for a 3% down payment mortgage include a credit score of at least 620, purchasing private mortgage insurance, and documented proof of income, assets, and job margin. This is not completely new, as FHA mortgages pay about 3.5%. This sounds risky for both the lender and mortgage insurer as there is only 3% margin. If there is a default, they probably won’t get all of their money back.

On the other hand, home prices are going up 5% a year, so 3% margin can turn into 8% in a year. We are seeing a deceleration in the housing market. It’s still increasing but at a slower pace. This is typically a precursor to market declines, meaning this boom is more like the ones of the 70’s or 80’s and not like the one precluding the Great Recession.

Millenials

No one is certain why milennials are not buying houses. It could be that the economy is still somewhat weak. It could be milennials as a group are uncertain. It could also be that cultural shifts have rendered neighborhoods less important, a trend towards urbanization, as well as waiting to marry and start families.

Lower oil prices are historically a good sign for GDP, the economy and jobs. Jobs are important for the housing market. Currently home prices in remote suburbs are weaker, meaning commuting costs will be more favorable to buying a house 45-60 minutes from the city. This is only a good investment in the sense that it’s the only one people make. It functions as a retirement plan of sorts. Buying a house has proven to be a poor investment. They have not gone up much in value in the last century, and the maintenance can be a financial drain.

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